1. Field of the Invention
This invention relates to a computer-based system, which enables parties and counterparties to be efficiently matched and which uses a netting methodology. The invention is exemplified by a new business model and system for foreign exchange transactions.
2. Description of the Prior Art
The Internet offers the promise of allowing buyers and sellers of goods and services to communicate directly with one another, eliminating the need for some of the intermediaries and the associated economic inefficiencies present in conventional selling. Hence, for example, it is in 1998 possible to transact many kinds of business using the Internet, which formerly would have required a broker or agent. Examples include the purchase of insurance, airline tickets, books and holidays.
The Internet also enables new models of buying and selling as well: for example, there are now many Internet auction sites, on which a wide range of goods and services are auctioned to the highest bidder, with the seller merely setting a reserve price or a bid start price. The terms to ‘buy’ and ‘sell’ and related expressions should be broadly construed to include any kind of transfer of rights or interests; ‘buyers’ and ‘sellers’ should be also broadly construed to include any transferee and transferor of any kind of right or interest. The terms ‘party’ and ‘counterparty’ are commonly used to describe a situation in which a given party is both a buyer and simultaneously a seller. This can arise, for example, where a party wishes to exchange U.S.$100 for the equivalent in Sterling. That party is simultaneously a seller of U.S.$ and a buyer of Sterling.
Computer systems linking many potential buyers and sellers of goods and services over an extensive computer network also existed prior to the widespread adoption of the Internet, particularly in the financial services sector. One example is the foreign exchange dealing systems developed and run by organisations such as Reuters plc and the EBS Partnership. In these systems, banks post the prices at which they are willing to buy or sell defined quantities of currencies. The systems may automatically spot matches—i.e. where a buyer is willing to buy at a price at which a seller is willing to sell—and complete the trade. If a potential buyer of currency can find no one willing to sell at a price it considers low enough, then typically, that potential buyer will simply have to either wait for the pricing in the market to become more favourable, or else be prepared to pay more. Such systems may be used for currency speculation, namely taking a trading position with respect to one or more given currencies to exploit favourable pricing movements.
Where a buyer and seller regularly trade with one another, it is normal to aggregate all transactions over a defined period of time and for just a single net payment to be made. Hence, for example, if party A buys 50 units at $1 from party B over a day, and counterparty B buys 20 units at $1 from party A over that same day, then the respective payment obligations can be netted off so that A pays $30 to B at the end of the day. This same principle applies to the more sophisticated environment of trading foreign exchange and other financial property. Where more than a single party and counter-party pair are involved, for example, a 3 way group or even higher orders, multilateral netting can be applied.
Netting systems should minimize the number of intra and inter company receipts and payments, which incur float costs in the banking system. Netting reduces the total payments (cost and credit structure improvement), the number of transactions (cost and system architecture improvement), and often, the risk in a transaction system (credit structure improvement). To illustrate this concept, if UKCorp1 owes UKCorp2 100 Pounds Sterling and UKCorp2 owes UKCorp3 100 Pounds Sterling, then UKCorp1 could pay UKCorp3 100 Pounds directly thereby reducing the payments from 200 Pounds total to 100 Pounds, and the number of transactions from 2 to 1.
In addition to the need for speculative currency trading, there exists also a very substantial need for corporations to buy and sell foreign currency, for example, to pay overseas suppliers. Similarly, individuals travelling abroad or making foreign investments need to obtain foreign currencies as well. Currently, corporations and individuals will approach a bank or foreign currency vendor (such as American Express Inc.) to obtain foreign currency. The bank or foreign currency vendor will in turn often have obtained its stocks of foreign currency from other banks, in many cases having used an inter-bank trading system such as the Reuters or EBS systems. Because of the chain of intermediaries, the transaction cost of buying or selling foreign exchange in this way is quite high: this is reflected in the commission charged and the difference between the bid and the offer prices: a bank will typically sell foreign currency at a rate considerably higher than the rate at which it will buy it back. For small transactions, the difference can be as high as 8%, but is typically in the 4% area. For larger transactions, the difference is typically 5 basis points.